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6 May, 2015 - 17:10

The internal rate of return, also called the discount rate, is the rate for which the net present value is zero. That is, the sum of future net cash flows discounted for time value of money is just equal to the initial investment for that particular rate. This internal rate of return is compared to the cost of capital or cutoff rate, and if higher, the project is accepted. When competing proposal are compared the project with the highest internal rate of return is chosen. Calculating the internal rate of return requires either a trial and error method by looking up in present value tables a present value factor given by dividing the initial investment by the annual cash flow, or with the use of a financial calculator or computer.